Given that I am the self-appointed queen of head-and-shoulders patterns, it will not surprise you that my inbox was filled this weekend with questions on the potential head-and-shoulders bottom in the S&P 500. Of course, in recent days I have been focusing more on the potential head-and-shoulders top in bond yields via iShares Barclays 20+ Year Treasury Bond Fund (TLT), rather than the bottom in the S&P. As we know, these tend to move in inverse fashion to one another.
First, for those of you who don't see the head-and-shoulders bottom in the S&P, see the chart below, with the annotations in red. I've left in the black line -- the lower line of the November triangle pattern -- so you can see how it has acted as resistance on this recent rally. The line is rising, meaning the resistance level is climbing with time -- and, as you can see, it should continue to act as resistance for at least a bit more time.
But I care about the underlying statistics in addition to the patterns, so I will carefully monitor these numbers on any move over the neckline. Before I note that data, I'll also mention that there are in fact three things converging right here at the same time: the 200-day moving average line, previous rally highs or resistance and the neckline of a head-and-shoulders bottom. As such, a move that has the S&P crossing upward, and out of this area, should not be dismissed.
As far as statistics go, though, the number of new highs on the NYSE will have to improve. The peak reading, in late October, was 174. Last week we saw 120. Friday the reading was a pathetic 84. Should the market break out, I expect the number to move upward, just based on the hundreds of stock charts I have looked at. But will there be enough to get above 175? That remains a question in my mind.
The NYSE cumulative advance-decline line has not led the advance; rather, it has essentially kept pace. But this, too, will need to make a higher high if the S&P is to break out and sustain the move. I believe this should easily confirm a breakout. In fact, I would be surprised if it did not.
I am more concerned about the Nasdaq's cumulative volume, which has been a laggard thus far. This indicator needs to improve, and quickly!
Here is the chart of TLT, which I have shown here several times in the last week, with that potential head-and-shoulders top. If equities are to break out and sustain the breakout then I believe TLT will need to breakdown and sustain such a move.
So a breakout above the neckline would be terrific, but only if it's accompanied by an improvement in new highs, a confirmation of breadth and a breakdown in TLT. Oh, there are some other statistics that would need improving, as well, but those three would be a great place to start.
